Fed officials see brighter global economic outlook

February 01, 2013|Alister Bull and Jonathan Spicer | Reuters

(Chip East Reuters, )

WASHINGTON/NEW YORK (Reuters) - Two top Federal Reserve officials painted a picture of cautious optimism on Friday for the U.S. economy in 2013, helped by stronger global growth as the central bank aggressively prints money to curb the nation's lofty rate of unemployment.

The Fed this week decided to keep buying bonds at a $85 billion monthly pace, and hold interest rates near zero until the jobless rate falls to 6.5 percent, so long as inflation does not threaten to rise above a threshold of 2.5 percent.

U.S. unemployment edged up 0.1 percentage point to 7.9 percent in January, and the economy shrank slightly in the final quarter of 2012.

But New York Federal Reserve President William Dudley and St. Louis Fed chief James Bullard, who both voted in favor of the U.S. central bank's policy decision this week, saw reasons to be cheerful about the year ahead.

Their remarks are the first public comments by Fed policy-makers since the central bank issued a statement on Wednesday outlining its decision to keep in place an unprecedented level of monetary stimulus, which has tripled its balance sheet to almost $3 trillion since 2008.

"I think a lot of uncertainties that were around this economy in 2012 have come off the table," Bullard told Bloomberg Television in an interview.

"The (U.S.) election has come off. Some of the fiscal risk that was in the U.S. has come off. The European situation has settled down a lot. China looks like it will have a better year. Emerging markets generally...will have a better year," he said.

U.S. lawmakers on Thursday voted to allow the federal government to keep borrowing money until at least May 19, averting a potential collision with the U.S. debt limit that could have caused the nation to default on its debt obligations.

Politicians had already sidestepped potential tax hikes on all Americans at the start of 2013 by agreeing to raise taxes only on families who make more than $450,000 a year.

SLOWING BOND PURCHASES?

Bullard, who is viewed as a centrist on the Fed's 19-member policy committee, said that continued improvements in the labor market during the course of the year would put the Fed "in a position to slow down or stop the purchases."

A closely watched employment report released by the U.S. government earlier on Friday showed that 157,000 new jobs were created in January, while the previous two months' scale of employment creation was also revised higher. U.S. stocks rallied on the news.

"Things aren't perfect. But things are definitely improving, and that will actually be helpful for the U.S. outlook," Dudley told the New York Bankers Association in a speech that was mostly focused on revamping the wholesale funding market.

"If the rest of the world gets healthier, the demand for U.S. goods and services will increase and that will provide support to our own economy," he said.

With the Fed forecasting unemployment to decline only slowly over the next two years, economists do not expect it to begin raising interest rates until 2015 and see bond purchases continuing for the rest of this year and possibly into 2014.

However, minutes of the Fed's December 11-12 meeting, which were released with a three-week lag, showed that several policymakers wanted to slow or halt the buying well before the end of 2013.

Bullard, who had opposed the third round of bond purchases when it was announced in September, said he voted to back its continuation at the most recent meeting because it was a decision to keep policy steady.

"I felt that was probably the right thing to do at this meeting and so I was in agreement with the chairman and the majority in this case," he said.

However, he made clear that the central bank's policy committee continued to wrestle with quantitative easing.

Nor was there any consensus on providing markets with more clues on when the purchases will end, beyond current Fed guidance that it will look for a substantial improvement in the labor market outlook in weighing when to stop.

"I don't think we have any more agreement among members at this point," he said.

Some Fed officials favor adopting numerical economic thresholds to guide expectations of when buying will end. But Fed-watchers doubt the committee will be able to quickly come to a consensus over this matter, and it may prove impossible.